Tuesday, December 3, 2013

Sichelman & O'Connor: Can Patents Promote Competition?

In the standard modern account, patents, because they provide the opportunity for market power, "tend to dampen competition."  However, in their fascinating article, Patents As Promoters of Competition: The Guild Origins of Patent Law in the Venetian Republic, Ted Sichelman and Sean O'Connor argue that patents evolved in the Venetian Republic as a way for the government to recruit foreign artisans who otherwise could not effectively compete in trades dominated by the Venetian guilds, particularly in the wool and silk industries.

In the guild system, foreigners and non-guild members could compete with the guilds, but only if they obtained a license - i.e. a positive privilege to practice in the polity.  However, licenses did not provide exclusionary rights.  This meant foreign license holders, while permitted to practice their trades, could not easily overcome guild members' existing market power or prevent guild members from copying any of their innovations.  Thus, Sichelman and O'Connor speculate, foreigners petitioned the Venetian government "not only for a positive privilege to compete with the guilds, but also for exclusionary rights over any inventions they might bring to the Republic."

This is a significant revision to classic accounts of the evolution of patent law. Although IP textbooks often cite Venice as the first patent system and note that Venice (and later England) used patents as a way to encourage foreigners to import their inventions, they do not stress that in the Venetian context patents benefitted innovative but unestablished outsiders (i.e. entrepreneurs) at the expense of incumbents. In making this claim, Sichelman and O'Connor echo work by economic historian Zorina Khan on the American patent system, arguing that "[t]he adoption of the patent system in Venice allowed in many senses for the 'democratization' of invention, diminishing the power of the guilds and increasing the power of independent inventors."

Yet they also stress that whether patents facilitate or hinder competition from outsiders is highly context specific.  In the Venetian case, patents evolved specifically in response to guild-dominated markets, and they evolved in an economy that was already flourishing. Thus, while in the early British system "substantial novelty" was generally sufficient to warrant an exclusive privilege on an imported invention, in Venice the "novelty" and "ingenuity" requirements were more vigorous. The reason, Sichelman and O'Connor claim, was that Renaissance England was a developing economy, eager to possess the arts that flourished on the continent. But Venice was then "the leading artisanal capital of Renaissance Europe," with the capacity to simply copy what others did abroad.

Interestingly, this dynamic reflects the debate that occurred in America when the First Congress was debating whether to allow "patents of importation," or to require absolute novelty under the United States Patent Act of 1790. According to Edward Walterscheid, the reason Congress chose the latter was that some American businessmen feared that allowing patents on known foreign inventions would interfere with their ability to imitate important English inventions that were already disclosed and available to copy.  I imagine a similar objection would be raised in the United States today if someone suggested reducing the novelty and nonobviousness requirements to promote importation of foreign technology or known domestic inventions that have not yet been "commercialized."  It is therefore somewhat ironic that Sichelman himself made a suggestion along these lines in his controversial piece "Commercializing Patents."

The article makes another quite significant contribution to potentially be incorporated into IP casebooks: the "first patent" may not have been, as patent law historian Frank Prager has asserted, a silk-specific directive from late 14th or early 15th century Venice. According to Sichelman and O'Connor, this assertion is based on a misreading of the Venetian Patent Act of 1474 and subsequent treatises interpreting the Act. They contend instead that the first documentary evidence of exclusionary patent rights for a "technological" invention "appears in 1416 when Ser Franciscus Petri, from Rhodes, was granted a patent by the Grand Council of Venice for a device for fulling wool (that is, turning it into felt)."  (The Petri patent has previously been discussed by Pamela Long and others.)

For anyone interested in patent law history, I highly recommend this excellent and concise article.  It also has obvious potential implications for entrepreneurs today. Perhaps, rather than dampening competition, patents help start-ups and small companies enter markets that would otherwise be dominated by incumbents, serving as a slingshot for the "Davids" against the "Goliaths."  The Venetian case provides a nice historic example of how this might play out.

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